The genesis backstop: B.Protocol brings new players to DeFi liquidations

Yaron Velner
Oct 1, 2020 · 5 min read

We are pleased to announce that Kyber Network’s top 3 liquidity providers (LPs) joined our genesis backstop, who will execute the liquidations at the first deployment of B.Protocol over MakerDAO, this month. The three LPs are Kyber Reserve, OneBit and reserve 0xeB74c8B319515593a26DaB10a13F19872C2Ecb02. The first two never served as liquidators (keepers) on DeFi platforms before, and in this post, they explain why B.Protocol made it easier for them to build a dedicated system for liquidations. The third LP is a veteran MakerDAO keeper, and the B.Protocol architecture allows them to simultaneously use the same inventory for B.Protocol liquidations and MakerDAO liquidations. Hence, thanks to B.Protocol, MakerDAO gets new keepers, while it still keeps all the existing ones.

We first talk with Spyros Vrettos from Kyber Reserve, and then with Peter Chan from OneBit.

Kyber Reserve

Spyros Vrettos is the head of trading at Kyber Network, and provides liquidity via Kyber Reserve for over 3 years. Kyber Reserve was the first to offer 24/7 continuous on-chain price quotes for almost 70 token pairs. The reserve is using state-of-the-art techniques to hedge its inventory from various sources and bring it on-chain. With almost $1B in volume since inception, it was one of the first to recognize the advantages of on-chain market making.

We asked Spyros, why Kyber Reserve was not an active player in DeFi liquidations, despite a hefty premium that is offered.

DeFi platforms are doing a good job in recognizing the need to incentives a strong backstop. Platforms like Compound give up to 8% discount on a typical liquidation. However, because of technical blokchain limitations, researchers predict that most of the premium will eventually go to miners. Hence, before B.Protocol, we did not think it was worth the effort of building an on-chain liquidation system.

You market make for many years, could you describe the differences between market making and being a backstop?

In both market making and in backstop we need to be able to hedge a position. However, in backstop, this is taken to the extreme, and we should be able to liquidate huge positions. As the ecosystem continues to grow, it is very likely that the liquidity standard spot exchanges that we use for market making hedging will not suffice, and we will have to hedge with future exchanges like bitmex and deribit. This requires considerable technical efforts, that we are only willing to make thanks to the certainty that B.Protocol will provide to the liquidators. As a byproduct of these efforts we would also be able to offer bigger liquidity in our market making venture, so it is a win-win situation for the entire ecosystem.

On-chain trading is very profitable but is notorious for being technically complex, how hard was it for you to adjust your system to B.Protocol?

Without B.Protocol, liquidators would have to build a complex front-running bot with super-strong network connectivity, in order to have some fair chance in winning even a small part of the liquidations. And this is even before you consider the actual trading and hedging challenges after a successful liquidation occurs. With B.Protocol, we can focus on the trading logic, and the extra technical effort is quite small. And the fact that we can use the same on-chain liquidity for B.Protocol and our market making in Kyber Network, will allow us also to offer bigger liquidity for Kyber Network users.

OneBit Quant

OneBit Quant is a proprietary trading firm that focuses on high-frequency trading and market making in crypto space. With their predominant trading strategies, they are handling more than 100 million dollars daily volume, and currently one of the top tier market makers of several tier 1 centralized exchanges and the major liquidity source of several decentralized exchanges.

Peter Chan is the lead quant trader at OneBit Quant, and we asked him why OneBit Quant did not become a DeFi keeper until now.

At OneBit Quant we trade both on centralized exchanges and DeFi, and while volumes on centralized exchanges are typically higher, the markup on volume tends to be higher on decentralized exchanges. Having expertise in both venues, we find the typical DeFi premium to be very appealing, however the uncertainty on who will get it makes it a race to the bottom. Hence, it is inevitable that eventually most profits will go to the miners, and it gives us very little incentive to participate. With B.Protocol, a smart contract fairly decides on who will do the liquidation. Thus, we feel more comfortable towards spending the needed efforts for a liquidation system.

Recently, a lot of liquidity is poured into decentralized exchanges by retail users. What do you think are the advantages of having a backstop of professional liquidity providers?

Retail users provide liquidity to platforms such as uniswap, sushi and balancer because they are rewarded for that by the platform native token. DeFi lending platforms try to incentivize liquidators by giving them a premium on liquidation price. However, we see that over time big chunks of the rewards go to the miners due to gas wars. Dumping the liquidations as a market order on retail users is similar to using a stop-loss-order mechanism instead of a backstop. Liquidations of big volume require a professional hedging system, especially in times where the market is volatile and liquidity is thin. A retail user is facing a guaranteed loss if he did not invest time in building a dedicated system for that.

On-chain liquidity is notoriously thin, how could OneBit Quant handle liquidations of quantities that exceed the decentralized exchanges order book depth?

OneBit Quant daily trading volume is over $100M, and we regularly rebalance inventory from centralized exchanges like Binance and Huobi, to decentralized venues like Kyber Network and other dex. B.Protocol design choices allows us to have full composability of our on-chain inventory and hedging algorithm. Hence, we do not rely only on decentralized exchange orderbook, and can rebalance our position also in centralized spot and future exchanges.

About B.Protocol

B.Protocol makes lending platforms more secure by incentivizing liquidity providers (keepers) to commit on liquidation of under collateralized loans and shift the miners extracted profits back to the users of the platform. B.Protocol was founded by Yaron Velner, who was previously Kyber Network’s CTO and a co-designer of the WBTC protocol.

For more, please visit our website, twitter, discord and github.


The Decentralized Backstop Liquidity Protocol

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